What a roller coaster ride it has been for the single European currency. From a whopping 20% gain in 14 months – 1.04 to 1.25 – to a 7% plunge in 1.5 months – 1.24 to 1.15. Traders’ paradise. The darling of currency markets, euro is suddenly looking extremely vulnerable – with renewed talks about its disintegration (courtesy, the political chaos in Italy). The market fears regarding government formation in Italy and that anti-Euro zone elements might creep in, are certainly overdone. The focus on Euro zone’s economic under-performance compared to the US is also gaining momentum – no doubt they are lagging. US bond yields are surging and the 10-year is hovering around 2.9 – 3.0%. As long as the Fed continues on its tightening path, yields will keep rising and dollar index will maintain its strength (weakening the euro).
Technically, EURUSD’s down-move is a bit over stretched. The momentum indicators are visibly oversold and there are positive divergences in Slow Stochastics and MACD Forest – indicating a probably euro recovery. A long standing upward moving trendline support comes around 1.15 – 1.16 (notice the green solid line). The 377-day simple moving average (SMA) comes at 1.1539 (red dotted lines). The previous EURUSD low (formed around 1.1550 in Nov’17) is a critical support – observe the blue solid line. My sense is that EURUSD is clouded with extreme pessimism and that it may rebound – the critical support around 1.15 – 1.16 should hold. Recovery should take it to 1.18 – 1.19 levels (to say the least). Any break below 1.15 will rescind the above forecast.